WRAPUP 3-U.S. jobs, service sector data suggest Fed could taper soon

Thu Sep 5, 2013 11:53am EDT

Related Topics

* U.S. service sector growth accelerates in August
    * ADP private payrolls rise 176,000 in August
    * Jobless claims fall to near five-year low in latest week
    * Unit labor costs flat in second quarter


    By Jason Lange and Luciana Lopez
    WASHINGTON/NEW YORK, Sept 5 (Reuters) - Solid U.S. jobs and
service sector data on Thursday bolstered views the Federal
Reserve could start slowing its bond-buying program as soon as
this month, but plunging orders for factory goods highlighted
uncertainty around the economic outlook.
    The pace of growth in the U.S. services sector accelerated
in August to its fastest pace in almost eight years, an industry
report showed on Thursday. 
    The Institute for Supply Management (ISM) said its services
index rose to 58.6, its highest since December 2005, from 56 in
July. The reading handily topped economists' consensus
expectations for 55 and beat the high end of forecasts.
    "Services represent approximately 85 percent of the economy,
so the continued expansion of the sector is critical for the
continuation of the overall economy recovery," wrote Thomas
Simons, a money market economist at Jefferies & Co in New York,
in a note to clients.
    In addition, U.S. private employers added 176,000 jobs in
August, and new jobless claims last week fell to a near
five-year low.
    The data could help convince the Fed that the world's
biggest economy is ready to stand on its own, able to withstand
a pullback by policymakers on $85 billion per month in buying of
Treasuries and mortgage-backed securities.
    Yields on U.S. Treasuries jumped to 25-month highs backed
views about slower Fed buying. Stocks were on track for a third
straight day of gains and the dollar notched multi-week peaks
against the yen and the euro, fueled by the U.S. economic data.
   
    Nevertheless, new orders for U.S. factory goods dropped in
July by the most in four months, a worrisome sign for economic
growth in the third quarter. 
    The Commerce Department said new orders for manufactured
goods dropped 2.4 percent. Analysts polled by Reuters had
expected an even sharper decline.
    While the U.S. economy has generally gathered momentum in
recent months, the recovery has been uneven, with occasionally
mixed data clouding the outlook for Fed policy.
    The number of planned layoffs at U.S. firms surged in August
to their highest in half a year, consultants Challenger, Gray &
Christmas, Inc said. 
    Still, data suggest the labor market - key for Fed decisions
- is seeing a slow but steady comeback.
    The 176,000 private jobs in the August report from payrolls
processor Automatic Data Processing and Moody's Analytics came
in just below the 180,000 expected in a Reuters poll, although
analysts said the report was good enough to keep Fed tapering
views on track.
    "(It's) enough to reinforce expectations that the Fed will
begin to taper its asset purchases," said Paul Ashworth, an
economist at Capital Economics in Toronto.
    
    JOBS HOLDING UP 
    Separately, the Labor Department said the number of
Americans filing new claims for jobless benefits fell 9,000 last
week to 323,000, below the 330,000 expected in a Reuters poll.
    The four-week moving average for new claims fell to its
lowest level since October 2007, before the 2007-09 recession
began. This measure, which is closely followed because it irons
out week-to-week volatility, dipped 3,000 to 328,500. 
    All told, the U.S. jobs market has held up better than
expected in the face of healthcare reform and government
spending cuts, Moody's Analytics' chief economist Mark Zandi
said in a conference call after the ADP report.
  
    The data come one day before the U.S. government's report on
August non-farm payrolls, which investors will scour in hopes of
divining the future direction of the Fed's massive asset-buying
program.
    The Fed is now weighing when to pull back on its so-called
quantitative easing program. Views it could slow its buying as
soon as its Sept. 17-18 meeting have sent Treasury yields
soaring more than 100 basis points in recent months.
    Policymakers say their decisions will depend on data showing
the health of the world's biggest economy. The Fed wants to see
the jobless rate closer to 6.5 percent from 7.4 percent
currently. 
    Economists in a Reuters poll, however, see the August
unemployment rate remaining flat and stagnant prices could also
worry the Fed. 
    A separate Labor Department report showed U.S. labor costs
were flat in the second quarter, a sign of minimal inflationary
pressures, which could fan concerns inflation is too low.
    At the same time, the report showed productivity rose 2.3
percent during the period, which was a bigger gain than expected
and gave a more hopeful sign for the outlook for wages.
    Over the last year, inflation has been well below the U.S.
Federal Reserve's 2 percent target, which has led some analysts
to expect the Fed could hold back on winding down its bond buys.
    Extremely low inflation is scary because it raises the risk
an economic shock - say, a meltdown in Europe or in emerging
markets - could tip the economy into a downward spiral of
falling prices and wages known as deflation.
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